Every year, Morningstar rates the country's best and worst 529 college savings plans. The ratings are based primarily on the same five key pillars that Morningstar uses to rank all investments: Process, People, Parent, Price, and Performance. Basically, Morningstar looks for plans with low fees, good investments, a decent selection of investment options, an asset allocation approach based on the most up-to-date research and solid management by the state and program manager.
In addition to the five categories listed above, the ratings also take into consideration any state tax breaks provided by the plans. This is important when deciding which plan to invest in because while every state has a 529 plan, not every plan provides a deduction for contributions to the plan.
In all, Morningstar rated 62 plans. Unfortunately, the DC College Savings Plan was not included in the ratings. This isn't unusual; Morningstar hasn't rated the DC plan in previous years. I've contacted Morningstar numerous times to request the inclusion of the DC plan, but I haven't had any success.
Without further ado, here are the best and worst plans for 2018 along with some commentary on the plans relevant to residents of DC, MD, and VA.
The Best
Invest529 (Virginia): This plan features age-based portfolios, passively managed portfolios (index funds), and actively managed portfolios (investments selected by a human). Residents of Virginia can deduct their contributions up to $4,000 per account, per year, with unlimited carryover to future tax years.
Honorable Mentions
CollegeAmerica (Virginia): Unlike the Invest529 plan mentioned above, this Virginia 529 savings plan is only available through investment advisors. It's managed by American Funds, which means the only investment options are actively-managed funds. Residents of Virginia can deduct their contributions up to $4,000 per account, per year, with unlimited carryover to future tax years.
Maryland College Investment (Maryland): This plan is managed by Baltimore-based investment company T. Rowe Price. It features enrolment-based portfolios and fixed portfolios. Residents of Maryland can deduct contributions up to $2,500 per year per beneficiary (child) from their state income taxes.
The Worst
College SAVE (North Dakota).
Florida 529 Savings Plan (Florida).
Franklin Templeton 529 College Savings Plan (New Jersey).
GIFT College Investing Plan (Arkansas).
TD Ameritrade 529 College Savings (Nebraska).
What About DC's 529 Plan?
In case you missed it, a couple of years ago I exchanged several emails with the department tasked with overseeing the DC plan. As a frugal financial planner, resident of DC, and saver in the DC plan, I was unhappy with then-manager Calvert Investments. The investment options were lousy and the fees were outrageous.
The DC College Savings Plan, now managed by Ascensus, is a huge improvement over the plan as managed by Calvert. I feel much better about recommending the DC plan to clients and friends.
Savers can choose from individual portfolios or year-of-college enrollment portfolios. In both cases, the underlying investments are mutual funds and ETFs from Vanguard, iShares, and Schwab.
Residents of DC can deduct up to $8,000 for married couples filing jointly, who have separate accounts, ($4,000 for individuals) when they contribute to their DC College Savings Plan account.
Which Plan Is Best For Me?
The answer to this question, like many other questions in personal finance, is: It depends.
If you live in a state that has a decent plan and where you'll receive a tax deduction, then, by all means, use that plan. If, on the other hand, your home state's plan is lousy, perhaps because of high fees or poor investment options, then you should opt for a plan in another state.
